What To Expect From January’s CPI Inflation Report

The Consumer Price Index for December 2024, will be released on January 15 2025 giving insight into recent inflation trends. Current nowcasts suggest that inflation may come in at a 2.9% headline annual rate, marking an acceleration from November’s figures of 2.7% annual inflation. However, core inflation which removes food and energy is forecast to remain flat at 3.3% compared to November. Nowcast data is based on real time observed prices for December, and so these estimates will update over the remaining weeks of the month.

Drifting Inflation

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Inflation drifting away from 2%, should that occur, may help confirm the market’s view that fewer interest rate cuts should be expected from the Federal Open Market Committee in 2025. That’s because inflation could remain stuck at closer to 3% than the FOMC’s 2% annual target and that may prompt the FOMC to retain slightly more restrictive interest rates. Inflation would likely be less of a focus for policymakers if the job market weakened significantly, but for now unemployment is only moving up relatively slowly.

“My view has always been that progress in the fight against inflation has to be judged from trends, not from a data release or two,” said Federal Reserve Governor Adriana Kugler. “I also anticipated that the process of bringing down inflation was likely to be sometimes bumpy.” Kugler’s statement was part of a speech on December 3. We will learn more from the FOMC’s statement and projections as well as Jerome Powell’s conference on December 18.

FOMC December Meeting

The December FOMC meeting will also include an update to the Summary of Economic Projections, where policymakers estimate where inflation will end 2025. The last projections from September estimated median inflation for December 2025 of 2.2%. Since then inflation data has drifted away from 2% and so it the FOMC may adjust their forecasts for inflation, if so, that may be another signal that fewer rate cuts are coming in 2025, though the forecast path for short-term rates will also be updated.

A Somewhat Robust Jobs Market

The job market has held up better than expected. Jobs are being added at a material rate, even if unemployment is creeping up. As such, inflation occupies a little more of policymaker’s attention, especially given the recent slight drift away from the FOMC’s 2% inflation goal due, in part, to accelerating food and energy costs.

The report of the Personal Consumption Expenditures price index on December 20 will matter to the FOMC too. Despite coming after the Fed’s December meeting, the PCE price index is the inflation metric that FOMC tends to pay most attention to. It too has seen some acceleration in inflation up from 2.1% in September to 2.3% in October. However, as Kugler noted these month to month moves may be noise rather than a real trend.

What To Expect

December’s inflation figures may show a little more acceleration in prices. The FOMC has said they won’t fret over single data point, but the question is at what point does a possible uptick in inflation become enough to prompt policymakers to cool plans for interest rate cuts. In expecting fewer cuts for 2025, fixed income markets on current implied forecasts suspect we may already have reached that point.